B&S Group S.A. (BSGR) Earnings Call Transcript & Summary

Hello, and welcome to the Q1 2022 trading update. My name is Josh, and I will be your coordinator for today's event. [Operator Instructions] I will now hand you over to your host, Tako de Haan, to begin.

Good morning, all. This is Tako de Haan, CEO of the B&S. With me here on the call is Peter Kruithof, our CFO. I will take you through the highlights of the Q1 2022 trading update that we published this morning. After that, I would like to open the call for Q&A. Let me start by giving you some detail on the first quarter of 2022. Our turnover growth of 14.6% all came from organic growth. This was largely driven by the liquor segment, further aided by sales growth in Personal Care, Food and Retail segments. Gross margin growth was suppressed by increasing marketing and transportation costs. This was driven by ongoing industry-wide supply chain challenges, product scarcity and rising digital advertising rates. Operating expenses increased due to scarcity in the labor market and increased hourly rates for warehousing staff, especially in our U.S. operations. The market recovery in our duty-free retail and travel business is, however, encouraging and we foresee further recovery for these markets in the remainder of the year. Now I will zoom in a bit on the market circumstances at each of the segment levels. Starting with B&N Liquors. The 29.3% growth in turnover for this segment was driven by the absence of COVID restrictions and by increased demand for specialty items in the international markets. Additionally, the container shortages issue improved somewhat in Q1. This led to slightly better order volumes for international liquor business. Sourcing prices increased less than anticipated, and this benefited gross margins when compared to the first quarter of last year. For B&S Beauty, we only saw turnover levels equal to Q1 of last year. The B2B businesses in the Beauty segment continued to see the impact of industry-wide product scarcity in the aftermath of the pandemic. Bottle and packaging shortages resulted in partial deliveries of placed product orders. Also, the lira and lilio ingredients bane throughout Europe caused decreased sales in this line of business. The B2C business, mainly FragranceNet.com, on the other hand, increased their turnover. However, it came at lower gross margins compared to Q1 of 2021. This is because in this quarter, the margin levels decreased to normalized pre-COVID levels, while marketing and shipping expenses increased compared to the same period of last year. For B&S Personal Care, we had great turnover. It increased by 9.7% as a result of sales growth to key customers, mostly the value retailers that opened their doors again in this quarter. This growth was aided by a broad variety of in-stock items. This is -- this allowed us to meet the increased demand after the on and offshore closures in European value retail chains throughout last year. B&S Food sales grew by 8.6% when compared to Q1 last year, driven by the recovery of the duty-free and travel market. This led to increased business for our brand distribution services. Next to that, the domestic business outperformed following increased demand in Europe and Africa. On the other hand, we fully missed the revenue from the remote business in Afghanistan after withdrawal of the troops end of last year. This altered business mix continued to impact our overall gross margin in the Food segment as remote businesses typically come at higher margin. B&S Health, the segment continued to be affected by the aftermath of the pandemic. Turnover declined by 13.9% compared to Q1 of last year. This was the quarter in which the positive impact of COVID for the segment leveled out. In Q1 of this year, the market circumstances equaled those of 2021, a large part of the travel vaccine business was still lacking, and reduced demand for hospital supplies continued as care treatments were still delayed. B&S Retail, to finish with. Compared to Q1 of last year, the Retail segment increased turnover with more than 300% in Q1 of this year. It is fair to say that in Q1 of last year, the travel and retail business was largely shut down. Although the overall outlook for the travel market is positive. In the first quarter of this year, the Omicron variant of COVID was still slowing down our recovery. And with that, I conclude the segmental review. Now zooming in on our financial position in the first quarter of 2022. Our balance sheet and liquidity remained healthy. Working capital and working capital in days increased when compared to Q1 of last year, but all in line with post-COVID market volumes in sizable markets. This is needed to meet the customer demands towards the traditional -- traditionally busier second half of the year. All in all, return on excessive working capital target of 25% is expected to be feasible at the end of 2022. That brings me to our outlook. Overall demand across our core markets is developing as anticipated. We expect demand for our digital supply chain solutions to develop further. We plan to leverage our B&S infinity backbone and continue to focus on improved operational efficiency. This is done by accelerating innovations and internal process improvements. We expect that the global impact of post-pandemic industry constraints in the supply chains and product scarcity will have a ripple effect throughout this year. We continue to manage these constraints diligently as we did last year. Nevertheless, the scarcity in the market and the inflation are driving the price levels up, a compounding factor could be that the consumer price elasticity will at a certain point reaches end. This is putting pressure on our turnover levels in especially the Beauty segment. Despite these challenges, we remain committed to a 7.5% organic growth for 2022. In general, the increasing price levels, combined with inflation on staff cost and operating expenses distressing our EBITDA margin target. Again, this is especially the case in the Beauty segment. Also, our fixed cost base, combined with traditionally slower first quarter resulted in a lower EBITDA margin in Q1 compared to the seasonally stronger second half of the year. We will have more visibility on market developments and volumes for the second half of 2022 after our half year publications. We will share our expectations for the EBITDA development for 2022 then. That ends our highlights for Q1. I would like to hand over to the operator for questions.

[Operator Instructions] And the question comes from the line of Robert Jan Vos from ABN AMRO.

Yes. I have a few questions. If we talk about the organic sales growth of 11.5% that you reported, can you say something on to what extent this is price-driven and to what extent you saw volumes grow as well? That is my first question. Then I read what you said about EBITDA and if you will provide more guidance at the half year results. If I remember correctly, you said to expect 25 basis points higher EBITDA profitability during your full year results release. Well, because of the rising costs, you are apparently less certain about EBITDA. I was wondering, if you look at last year's EBITDA of EUR 116 million, is that a challenging level? Or is that a level that you should be able to achieve in 2022? The third question I have is the cost pressures and inflation you see in the product prices. Is that mainly impacting EBITDA margin negatively? Or should we also anticipate an effect on your gross profit margin? So far, the gross margin has developed a bit more stable, I believe, than EBITDA profitability. So what are your thoughts here going forward? And then lastly, you announced this small acquisition in France in April. You closed it in May. But yes, there's still no details about the deal. So is there a specific reason why you have not disclosed the name of the company that you're now the owner of? Those were my questions.

Yes. We [indiscernible] for because I -- my business -- no, no -- yes, yes, yes. I think in general, let's start with the organic sales growth. Well, at this stage, of course, it's a combination of both, although we already see as also indicated in our press release, prices increasing. So of course, we try to navigate away from absorbing all those price increases ourselves. In other words, we are also charging the customers higher prices. I think in general, in the Liquor segment, the price levels are a bit more stable. In the Beauty, we have seen, of course, the product prices increase. And the same also goes for Food as you read all about in the newspapers as well. So basically, it's a combination of both. However, volume driving the vast majority of it. If we look at our EBITDA, indeed, as indicated EUR 116 million last year. Yes, of course, we -- in line with sales growth, we wanted to increase both the EBITDA margin and, of course, also the absolute EBITDA number. It's a little bit difficult to predict at this moment, especially given the price increase as we see at the purchase side. Q1, as we all know, is always our slowest quarter. In other words, the volumes are really in the second half of the year. And I think in our half year report, we will also clearly see what the portfolio for the second half and the market developments for the second half, what they look like. And at that stage, it's also possible to indicate what the volumes will be. And as such, where the EBITDA and also the EBITDA margin will land. I think if I look at the cost base, then basically, it's affecting both the gross margin and the EBITDA margin. If we look at the gross margin that we really see the distribution cost, of course, especially driven by the fuel cost quite high. Also the marketing costs, they are included in our gross profit margin. So also there, we see with the increase of the costs that our gross profit margin is decreasing a bit as far as for the EBITDA that effect is being increased by staff costs increasing, but also in general, operating expenses increasing. Of course, if we look at the warehouse, then yes, we also have to -- not now, but especially in the winter, we have to heat it so that we saw the cost increase. Also, we -- in the Food segment that we see an increase for the cooling charges. So those expenses are increasing and as such lowering our EBITDA margin. If we look at the acquisition we did in general, given the fact that it's a relatively small acquisition, you can imagine that the name for especially investors are not that interesting because it's not a really well-known name, no name. However, for competitive purposes, we do not want to disclose the name right now, especially given the fact that we also, of course, have other competition in the market, and we don't yet want them to know that B&S is behind this company. Does that answer your questions, a lot of them?

Yes, that answers my questions.

[Operator Instructions] Okay, it looks like we have no further questions on the line. So I'll turn it back over to the speakers.

Thank you all for joining us this morning. If you have any additional questions, you can reach us via Investor Relations.

Thank you very much for joining the call today. You may now disconnect your handsets.